Nearly four years ago, as America was still crawling out of the crater left by the collapse of the economy, a former CEO of AIG — a company whose name had become synonymous with the crash — sued the federal government over the bailout, alleging that the government had violated shareholders’ Fifth Amendment rights. Today, a court sided with wealthy investor Maurice “Hank” Greenberg, but he won’t be getting any damages because the company would have gone bankrupt without the bailout.

Greenberg held the top position at AIG for 37 years before exiting in 2005 in the middle of a fraud scandal that cost the company nearly $2 billion, but as the controlling shareholder of Starr International, he has remained a substantial investor in the company.

When AIG was on the brink of failure in 2008, the federal government stepped in and provided an $85 billion loan in exchange for a 79.9% ownership stake in the company.

In Nov. 2011, Greenberg sued the U.S. government on its own behalf and on the behalf of groups of affected shareholders.

The lawsuit alleged that the shareholders had been deprived of their Fifth Amendment rights against having their property (i.e., their shares) taken by the government without receiving just compensation in return.

In today’s ruling [PDF] by the United States Court of Federal Claims, the judge sided with the Greenberg and the investors on their claim that the government went too far.

“The weight of the evidence demonstrates that the Government treated AIG much more harshly than other institutions in need of financial assistance,” reads the opinion. While the financial crash put AIG in a dire position with regard to its liquid assets, the court found that at the time of the bailout, “AIG’s international insurance subsidiaries were thriving and profitable.”

The judge says that the government’s justification for not just bailing AIG out, but for taking control of the company — which included having the authority to appoint a CEO — “appears to have been entirely misplaced,” and notes that the government didn’t demand shareholder equity, high interest rates, or voting control of the other bailed-out financial institutions.

“Indeed, with the exception of AIG, the Government has never demanded equity ownership from a borrower in the 75-year history of Section 13(3) of the Federal Reserve Act,” writes the judge, saying that this law does not authorize the Fed to acquire equity in a borrower as consideration for a loan.

“[T]here is nothing in the Federal Reserve Act or in any other federal statute that would permit a Federal Reserve Bank to take over a private corporation and run its business as if the Government were the owner,” explains the ruling. “It is one thing for [the New York Fed] to have made an $85 billion loan to AIG at exorbitant interest rates… but it is quite another to direct the replacement of AIG’s Chief Executive Officer, and to take control of AIG’s business operations.”

Interestingly, the judge says that because the government’s takeover of AIG was illegal, Greenberg and the other plaintiffs can’t make a Fifth Amendment claim.

“A ruling in Starr’s favor on the illegal exaction claim, finding that the Government’s takeover of AIG was unauthorized, means that Starr’s Fifth Amendment taking claim necessarily must fail,” reads the ruling. “If the Government’s actions were not authorized, there can be no Fifth Amendment taking claim.”

The court notes that, since the government did make a $22.7 billion profit of its unauthorized seizure of 80% of AIG, a case could be made that this profit should be returned to shareholders — but — “Starr’s claim, however, is not based upon any disgorgement of illegally obtained revenue.”

Rather, the lawsuit was based on the share price on the day the company was bailed out by the Fed. However, the judge says that this price is likely inflated based on the $85 billion cash infusion from the government.

“In the end, the Achilles’ heel of Starr’s case is that, if not for the Government’s intervention, AIG would have filed for bankruptcy,” concludes the judge. “In a bankruptcy proceeding, AIG’s shareholders would most likely have lost 100 percent of their stock value.”

The opinion deems it “troubling” that the government is “able to avoid any damages notwithstanding its plain violations of the Federal Reserve Act.”

In the eyes of the judge, this implies that the government can bail companies out, illegally demand equity “knowing that it will never be ordered to pay damages,” but says this is not a matter for this court to rule on.

“The end point for this case is that, however harshly or improperly the Government acted in nationalizing AIG, it saved AIG from bankruptcy,” concludes the opinion. “Therefore, application of the economic loss doctrine results in damages to the shareholders of zero.”

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